At a time when assets such as toll roads, bridges and airports look expensive in many developed markets, two of Canada's largest pension plans are turning to renewable energy infrastructure.
The Ontario Teachers' Pension Plan and the Public Sector Pension Investment Board (PSP) have teamed up with Spain's largest lender, Banco Santander SA, in an equal partnership to back Cubico Sustainable Investments. The London-based firm will construct new renewable energy projects around the world.
Cubico already has a portfolio of 19 primarily wind assets, as well as solar and water infrastructure valued at about $2-billion (U.S.). Not all of the assets are operational, with some under construction or in the development phase. When completed, the structures are expected to generate more than 1,400 megawatts of power.
Marcos Sebares, chief executive officer of the newly formed firm, said Cubico also has a number of potential new projects waiting in the wings and the capital ready to deploy to double the size of the investment firm within five years. The pension funds have said they will support this growth.
The opportunity arose just as Teachers was wrapping up a review of its approach to infrastructure investing. Capital flooded the sector in recent years amid lower interest rates that made asset classes such as bonds less attractive on a relative basis, but the number of assets hadn't changed dramatically.
"We said, 'How can we continue to deploy capital for infrastructure risk-adjusted returns we feel satisfied with?'" said Andrew Claerhout, leader of Teachers' Infrastructure Group. The pension plan began thinking about getting involved in the development of infrastructure projects earlier, rather than targeting fully developed assets.
The Cubico investment "fits right in the sweet spot," Mr. Claerhout said, as it targeted riskier new development ideas called "greenfield" assets alongside running a portfolio of existing structures called "brownfield."
The partnership, which was first proposed in late 2014, offers Teachers and PSP a chance to build new wind and solar energy projects from scratch in countries with friendly policies toward renewable power. The company has local connections and development partners that Cubico says will add value to projects, with both the management team and the initial assets spun out from Santander.
"We want to mainly focus on construction assets. This is where we have the most experience over the last 10 years working together in this franchise," Ricardo Diaz, head of the Americas at Cubico, said on a media conference call. He said the company is targeting returns of at least 10 per cent on its investments, as it takes advantage of the significant growth opportunities it sees. Returns will depend on the market, contract horizons and whether the assets are constructed or have yet to be developed.
The falling costs of wind and solar energy technology, which allow investors to generate more power for less initial investment, are yet another draw to the space, Mr. Claerhout said. So is the increasing predictability of performance and maintenance over decades, limiting some risk.
"From PSP Investments' perspective, renewable energy is a unique sector that not only can deliver attractive risk-adjusted returns for its stakeholders, but also contributes to providing the world with a sustainable, carbon-free and green electricity source that will continue to increase as a percentage of the overall electricity generation mix," said Mark Boutet, spokesman for PSP. In 2014, renewables made up 9.1 per cent of the world's electricity production, according to a United Nations Environment Program study.
For Cubico, the pension funds make ideal partners, not only because of their long-dated liabilities, but also because they have already built up their own renewable energy investments and connections.
"Already there are synergies that are coming out. They're constantly referring new business opportunities to us," David Swindin, Cubico's head of Europe, said on the call. Existing European assets can be found in Italy, Portugal, Spain and Britain. "The focus in the next few years will be on the EU, primarily," said Mr. Swindin, although he added that expansion into Asia was a longer-term goal.
Mr. Diaz said the company was monitoring North America for investments, primarily in wind and solar energy. Right now, assets are located in Mexico, Brazil and Uruguay, with Mr. Diaz highlighting Peru and Colombia as South American countries of interest where the firm does not yet operate.
Mr. Claerhout also expects that the company will grow globally in the coming years. "Climate change is real, and people's desire to address climate change is going to change the energy mix globally to be cleaner," he said.